Gin and spirits supplier British Honey Company (LON: BHC) has plenty of spare capacity in its distillery and production of alcohol sanitisers will use up some of that capacity in the short-term. Longer-term, the strategy is to buy other spirits brands.

There is a shortage of sanitisers due to the coronavirus and HMRC has given permission for British Honey to produce denatured alcohol. It should be able to start selling products later this week.

The sanitisers are made with 70% alcohol and extracts of honey and green tea.

British Honey joined Aquis Stock Exchange at the beginning of this week and raised £4.25m (£3.88m after expenses) at 110p a share. Advanced assurance of eligibility for the Enterprise Investment Scheme has been obtained. The initial market capitalisation was £10m. Cairn is corporate adviser and Stanford Capital Partners is broker.

The current share price is 120p (110p/130p). Nearly 147,000 shares have been traded.

History

British Honey started off as a honey producer and moved into craft spirits infused with honey in 2017. Honey sales still contribute to revenues and total production is seven tonnes a year. Production is being increased so there should be plenty for expansion in spirit production.

Keepr’s Classic London Dry Gin was the first spirit developed by the company. It sells 14 spirits, including vodka and rum. They are sold through Waitrose, Majestic and other outlets. There are five more spirits that have been developed.

A computer-controlled, 1,000-litre capacity still and bottling facility with a capacity of 1.5 million bottles a year. Ingredients can be tracked. There has been £4m invested in this infrastructure.

The existing products use a small proportion of this capacity. The company also produces spirits on behalf of third parties. There is also a bonded warehouse to store own and third party products.

Even so, there is still spare capacity. At the beginning of this year, British Honey acquired assets of The London Distillery Company for £66,000 from its administrator. This included the organic Dodd’s Gin and Rye Whiskey brands, as well as distillery equipment, which is not currently in use.

This has broadened the range of distributors. How much of the revenues generated by the business can continue to be generated by British Honey is difficult to say, but there could be a significant increase in revenues from the acquisition.

Distil

British Honey has signed a deal with AIM-quoted Distil (LON:DIS) to produce a botanical vodka, which will be marketed by Distil. The plan is to launch the vodka this year. Revenues will be shared equally.

If the initial deal is successful there could be other ways that the two firms could collaborate. Establishing a London-based distillery is being considered.

Figures

In the year to March 2019, revenues were £558,000 and the underlying loss was £904,000. In the six months to September 2019, revenues were £233,000 and an increase in interim costs meant that the interim loss was £691,000.

Last year spirit sales were £476,000 and honey sales were £82,000.

British Honey has pro forma net cash is £4.3m. This will provide plenty of fire power for acquisitions as well as investment in marketing and product development.

The directors own more than 26% of British Honey. The largest shareholder is Bermuda-based Cottisford Ltd with 28.5%. It has appointed Wafic Said to the board.

Expansion

Gin is one of the fastest growing sectors of the UK spirits market and it is also growing internationally. There is plenty of spare capacity to grow into.

New products will take up some capacity, but acquisitions will speed up the process. Discussions have begun with some potential targets.

The ability to produce and sell sanitisers will utilise British Honey’s capacity and provide additional income while these deals are being done.

Sales from pubs and retail outlets are likely to be hit in the short-term, but online sales for home delivery will increase. Whether they will fully make up for the loss of trade sales is uncertain.

British Honey is a well-invested business that has the capacity to expand in a growing market.